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China displaces the US in East Asia

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China Races to Replace U.S. as Economic Power in Asia

By JANE PERLEZ

JAKARTA, Indonesia, June 27 From South Korea to Indonesia, China is rapidly strengthening its economic presence across Asia, gobbling up foreign investment and chipping away at the United States' position as the region's economic engine.

As it buys up goods, parts and raw materials from its neighbors as never before, China has accompanied its new heft with diplomatic efforts to assure them that it wants to offer cooperation, not competition. Many have rushed to China's embrace and are nimbly shifting their economic alliances, particularly as the United States makes its way through only a tentative economic recovery.

"For all these countries in Asia, China is such a large force, the only rational response is to figure out how to work with it," said Nicholas R. Lardy of the Brookings Institution. "It can't be stopped."

The United States still remains an essential trading partner for Asian countries but is becoming somewhat less important in the face of China's rise, analysts say. Some see China's economic thrust, more apparent now under its newly minted membership in the World Trade Organization, as the beginning of an inescapable process of China replacing the United States as the dominant power in Asia.

Inevitably, said James Castle, a longtime American businessman in Indonesia and until recently the leader of the American Chamber of Commerce here, "the policy leverage of the United States as the great market is sure to decline."

China is already an economic and political threat to Japan, the prime ally of the United States in the region, these analysts say. Mr. Lardy says China's trade is now growing at a faster rate than Japan's growth during its boom years in the 1960's and 1970's.

Asian exports are rebounding on the strength of this rapid expansion as China buys more and more from its Asian neighbors.

Here in Indonesia, President Megawati Sukarnoputri has buried age-old hostilities as she woos the Chinese government, hoping that it will award Indonesia a $9 billion liquid natural gas contract to power the industries of southern China.

At the same time, China is grabbing much of the new foreign investment in Asia, leaving its once-glittering neighbors Thailand, South Korea, Singapore with crumbs compared with the record $50 billion China is expected to gain this year.

China a hungry importer, a siphon of other nations' foreign investment and a surging exporter of cheap manufactured goods is forcing its Asian neighbors to adjust.

Some, looking to stave off China for as long as possible and in an effort to ensure a future balance in the region, have tried to hedge their position with the United States.

Singapore, for example, is in the final stages of negotiating a free trade agreement with Washington, trying to guarantee that its solid ties with the United States will continue.

So far, the Bush administration has been loath to talk publicly about China as an economic challenger in Asia. But on a recent tour through Southeast Asia, the United States trade representative, Robert B. Zoellick, dispensed advice to allies on the subject: he told the 10-member Association of South East Asian Nations, or Asean, usually a group of bickering competitors, that they had a better chance of surviving Chinese dominance as cohesive trading partners than as individual competitors.

While deep concerns about being left in the shadow of China endure, Asian leaders are choosing to praise China's rapid development as a benefit to their economies.

Singapore's exports to China surged by 69 percent in April, over the previous April, mainly because of petrochemical and pharmaceutical sales. Malaysia's exports to China have increased by more than 30 percent in the last three months, driven mostly by electronic products.

In a sign of the new realism about China, Asean, yet to agree on a free trade zone among its members, agreed last November to trade talks with China. The idea for the trade zone came from China, acting to alleviate resentment in the region over its new membership in the World Trade Organization.

Now a mutual courtship has emerged between China and its neighbors. "I look at China as a friendly force," said Indonesia's minister of trade and industry, Rini Soewandi. "It is a potential market for us and China sees Asean as a potential market for them."

President Megawati, who is taking a more independent stance regarding the United States than her predecessors, has visited China twice since becoming president less than a year ago. Until recently, Indonesia had viewed China as a hostile power.

Prime Minister Mahathir Mohamad of Malaysia told his fellow leaders they should stop looking at China as a "black hole" that sucked foreign investment from its neighbors. Dell Computer decided recently to move some of its computer-making facilities from Kuala Lumpur to China. But, said Dr. Mahathir, "We want to live with the fact that there is a China there and it is going to be a very prosperous, very big and economically powerful China."

At China's embassies in the region, diplomats are open to talk of new cooperation. "Economically we are more complementary with Southeast Asia than Europe is with the United States," said Tan Weiwen, the minister counselor for economics and commerce at the Chinese Embassy in Jakarta as he repeated the government mantra. "Everybody is comfortable with each other."

The sudden economic influence of China on the region is evident almost daily. New statistics from Singapore show that the country lost more than 42,000 jobs in the last five years, most of them to China. With the property market stuck in the doldrums, Singapore developers are moving to Shanghai to grab a corner of the boom in what is commonly regarded as Asia's most vibrant city.

"Singapore has to do things that the Chinese can't do," said Andy Xie, the chief economist for Asia and the Pacific at Morgan Stanley in Hong Kong, who believes that Southeast Asian countries will survive best by creating niche markets for themselves in China.

"Singapore stands for business integrity so when a Singapore company builds property in Shanghai, it sells well," Mr. Xie said.

Chinese tourists have become the fastest growing business opportunity for Asian countries. They peer at sites in Thailand and Malaysia that used to be the preserves of American and Japanese travelers. Chinese products are also appearing from Taipei to Jakarta. Cheap Chinese motorcycles, made at a joint venture plant, are flooding the urban centers of Indonesia, for instance.

As part of what China is calling its "go global" strategy, the Bank of China has opened branches in Thailand, Malaysia and Singapore and will soon reopen one in Jakarta.

But the key for China's neighbors, say analysts, will be how each one fashions its response to a growing China. South Korea, Taiwan and Singapore have recorded strong gains in exports to China in recent months.

But Mr. Xie said the strong exports by South Korea and Taiwan to China could prove to be a fleeting success. "The export story for South Korea and Taiwan may not be so good because the components and parts factories will shift to China," he said. "Anything with volume is likely to end up in China."

South Korea and Taiwan, as well as Malaysia and Singapore, will have to adapt cleverly by going further upscale, he said. For example, with its well-educated work force, Singapore plans to spend billions of dollars to reinvent itself as the biomedical center of Asia.

Indonesia, a major producer of oil and gas, appeared to be in a strong longer-term position as China looks to invest there to double its oil consumption in the next decade, he said. In January, the Chinese state-owned offshore oil company CNOOC bought the lucrative Indonesian oil and gas fields owned by the Spanish company Repsol-YPF for $585 million. Last month, the PetroChina Company outbid four rivals to buy the Indonesian assets of the Devon Energy Corporation for $262 million.

Some Asian officials say they fear that Southeast Asia will be relegated to the role of supplier of food and raw materials to China in exchange for cheap manufactured goods that will, in turn, harm their own businesses.

But for now, China's need for imported energy combined with its desire to diversify its supplies, from the Middle East primarily, is making Indonesia, at least, feel confident.

President Megawati's chief economic adviser, Laksamana Sukardi, arrived for breakfast with reporters recently carrying a Chinese-language book under his arm. "The future," he said.


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